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There s Virtually No Ceiling To Mobile s Potential In The Larger Payments And E-Commerce Markets. Tony Danova October 14, 2013

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There’s Virtually No

Ceiling To Mobile’s

Potential In The Larger

Payments And

E-Commerce Markets

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Copyright © 2013, Business Insider, Inc. All rights reserved.

There’s Virtually No

Ceiling To Mobile’s

Potential In The Larger

Payments And

E-Commerce Markets

Tony Danova | October 14, 2013

Mobile transaction volume is growing

explosively: Mobile is now a powerful force in shaping the payments industry, particularly credit and debit card

payments. A significant portion of card-powered e-commerce transactions take place on tablet or smartphone devices. Tablets and smartphones are also powering transactions at physical stores — on the consumer and merchant side — through apps, scannable QR codes, and attachable card readers that transform devices into cash registers.

Defining mobile payments and transactions: There's a lot of confusion out there about what is and what isn't a "mobile payment," and we'd like to reiterate our definition. A mobile payment occurs when a mobile, Internet-connected device (tablet, smartphone, or in the future ... a smart watch or Google Glass) is used to facilitate a transaction that might otherwise have taken place using a physical credit card, check, or cash, at a physical store or point-of-sale. Mobile

transactions are a larger category that includes these

payments, but also includes mobile commerce, or e-commerce channeled by an app or mobile website (e.g., Amazon's iPhone app).

The U.S. is still lagging behind, but growth is

skyrocketing: Mobile transactions will account for about 2% of all credit and debit card volume in the United States in 2013. But, since 2008, mobile transactions have enjoyed 118% annual average growth. Markets in Africa and Asia-Pacific actually see a much larger share of mobile-driven transactions.

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Consumer uptake has exploded: Smartphone users are quickly adopting mobile wallets, payments apps, and QR-scanning apps to facilitate offline and online purchases.  Merchants are rushing to incorporate card

readers: Mobile device attachments can transform tablets into replacements for clunky point-of-sale systems. They're a perfect fit for small to medium-sized businesses, or SMBs. Recent survey data shows that two-fifths of U.S. SMBs have adopted card readers.

The industry is ripe for consolidation: Payments app developers, niche technology providers, and small payments start-ups are enjoying massive growth and helping to push forward innovation. Look for larger digital payments

companies to acquire these upstarts, much like PayPal recently did with mobile payments provider Braintree.

At the same time, mobile payments solutions continue to proliferate, so the market is no less crowded. For example, Amazon's new "Pay With Amazon" product allows the 215 million active Amazon account-holders to use their payment info as they shop on their PCs and mobile devices on different commerce sites and apps. While it's not yet meant to facilitate offline payments, it certainly might in the future.

The industry is still in a state of flux. New

technologies are emerging, while once-promising tools are sputtering: Take near-field communication, or NFC — uptake has failed to impress. Now, Apple's Bluetooth-powered iBeacon technology may challenge NFC head-on.

Executive Summary

It's no longer a question of when and how mobile will emerge as a payments platform.

The habit of paying for things on smartphones is already ingrained in the modern consumer society, particularly among young consumers.

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The way digital payments companies like PayPal helped usher in the PC-based e-commerce explosion, mobile-focused companies are exploring how to make mobile transactions easier, for both shoppers and merchants.

Mobile payments: Point-of-sale transactions will

increasingly be mediated by mobile devices. On the consumer side, apps such as Square Wallet are being used at retail locations in lieu of physical credit cards and cash. It's important to note that credit cards are still powering these transactions, since the card-holder's information is stored in the apps. On the merchant side, attachable credit card readers are being plugged into tablets and smartphones, transforming them into registers capable of taking physical credit card payments.

Mobile commerce: Meanwhile, e-commerce players large and small have raced to roll out apps and mobile sites that make it as simple as possible for online shoppers to shop on their phones and tablets. This is crucial as digital shopping moves from PCs to mobile. The lack of keyboards and mouse-guided cursors means that the old mantra about "frictionless shopping," championed by Amazon's one-click philosophy, becomes even more crucial.

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Currently, mobile payments and transactions innovation is being led by start-ups and tech companies, who are prompting legacy payments technology players and credit card companies to rethink their

strategies. In several prominent cases, credit card-processing

businesses have decided to team up with mobile-focused companies like Square and PayPal, rather than trying to build a mobile strategy from scratch.

In this report, we'll discuss where mobile payments and mobile commerce currently stand in the bigger payments picture, the

implications of recent mergers and acquisitions, and which payments platforms are becoming the most popular.

Again, we've chosen to define mobile payments strictly as point-of-sale mobile transactions powered by mobile devices or a mobile phone number, either on the merchant or consumer side. We do not include e-commerce site or app transactions from a mobile device in

our definition of mobile payments. Mobile commerce is part of the

overall mobile transactions space, but takes place strictly online, as online users shop on apps and sites.

Our categories cleanly separate mobile payments, also sometimes called "proximity mobile payments," from the e-commerce and mobile commerce markets. Another advantage: Instead of limiting the definition to the consumer-focused term "mobile wallet," it also acknowledges the merchant-side potential of mobile payments. This report will focus mainly on mobile payments. But we'll take a first look at how mobile is reshaping a key portion of the larger

payments space: the $3.3 trillion in credit and debit card transactions that take place in the U.S. every year. Globally, the number is several times larger, roughly $6.9 trillion in 2013.

Click here to download a PPT slide deck for this report »

Click here to download the charts and data associated with this report in Excel »

Where We Are: The Numbers

Benchmarking our previous mobile payments forecast of about $223

billion in volume for 2013 against the larger credit and debit card industry, we project that the mobile side of transactions — both mobile payments and mobile commerce — will account for about 4% of total global credit and debit card transaction volume in 2013 (see chart, below).

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Copyright © 2013, Business Insider, Inc. All rights reserved. It's important to note that mobile payments are

considerably larger than mobile commerce, by a factor of three-to-one.

That's because mobile payments are carving out a share of the offline commerce market. Offline is still a much, much larger pie than e-commerce, which is where mobile commerce peels off its transaction volume.

The increase in mobile payments volume is driven mainly by the explosive global growth in smartphone penetration, which means more transactions driven by mobile apps and services, especially in countries with underdeveloped consumer banking and credit systems.

But we also consider the increasing proliferation of smartphones and tablets used as low-cost register systems on the merchant side, as well as the fact that mobile payment apps are close to achieving what is known as "convenience parity." In other words, they're almost as easy to use as physical credit cards and cash.

The U.S. has been lagging behind mobile payments leaders like Asia-Pacific and Africa, but we believe U.S. mobile payments are poised for strong future growth.

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In 2013, U.S. mobile payments and commerce already combine for about 2% of total credit and debit card volume. That seems to be a low number. However, mobile-based transactions in the U.S. have grown 118% per year on average for the last five years. It's what will make the U.S. a leader in the mobile payments space going forward.

A Gartner forecast on mobile payments and mobile

commerce predicts that North American volume for both will grow an average of 34% annually in the five years to 2017. That's the top growth rate among all regions.

Consumer And Merchant Adoption Of Mobile

Payments

Mobile payments will take off once consumers and larger merchants adopt them. Like many disruptive technologies, mobile payments were originally adopted by a certain underserved segment, in this case small and medium-sized businesses.

This market has grown nicely, as the success of Square and its imitators has shown.

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But usage won't really take off until mainstream consumers accept paying for things at stores with their phones. That's starting to happen thanks to the fact that large-scale merchants like Starbucks, Apple, and Home Depot are starting to weave mobile payments mechanisms into their in-store payment options.

On the consumer side, a host of small-scale apps and "mobile wallet" platforms have offered shoppers mobile-based payment options and enjoy increasing name recognition, although usage of most is still relatively low. (See chart, above.)

PayPal, thanks to its brand legacy from the older, larger digital

payments industry (as well as its ties to eBay), enjoys 100% consumer awareness of its capabilities as a mobile wallet, according to a recent survey from PriceWaterhouseCoopers.

It also blows other payments apps and platforms out of the water in terms of usage, capturing about 85% of survey respondents.

Google Wallet, the Starbucks app (which is powered by Square), and Square Wallet itself all benefit from decent consumer awareness, but actual uptake is minimal. Starbucks runs a distant second to PayPal, with 15% of respondents saying they use it.

Starbucks' partnership with Square is proving to be a huge success. In July, Starbucks reported that 1 in 10 transactions in their shops happen on a smartphone. Starbucks executives have also reported that their stores process three million mobile-based transactions every week.

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It's perhaps not that surprising that mobile wallet transactions fit nicely in a grab-and-go establishment like Starbucks.

But Starbucks' success with mobile wallets also shows that consumers will embrace mobile payments if the opportunity is offered, and it's easy to understand.

Will Payments-Solution Providers Offer Other

Services Too?

Mobile wallets may also offer consumers more than just a way to pay for things.

According to a recent survey from mobile marketing firm Vibes, nearly 85% of smartphone owners said they would like to receive non-payment services from a mobile wallet, value-added features like loyalty cards, coupons, personalized offers, and other marketing material. This is the area in which Apple's Passbook app has excelled. According to Vibes CEO Jack Philbin, there seems to be a bit of a mobile wallet disconnect. Mobile users feels that they haven't really been offered the option to adopt

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featured mobile wallets. In fact, only 19% say they have actually

been offered such content.

Further, 89% of consumers claim they would sign up for personalized messages directly from retailers, yet only 18% have been offered this feature. Clearly, consumer uptake on non-payment mobile wallet content lags behind demand, and that may ultimately hurt retailers in the long run.

Philbin says that mobile wallets won't just be about powering transactions, but about offering another medium through which retailers can build audiences and communications platforms: "The more channels you're engaged with the consumer, the better." On the merchant-side, card readers have found a niche with small to medium-sized businesses precisely because they offer value-added services, like payments and accounting software, bundled with the devices. Again, credit card readers are small, dongle-like devices that attach to a tablet or smartphone, usually through the audio jack, and allow merchants to swipe credit cards and process payments without needing expensive and clunky register systems.

According to a survey from BIA/Kelsey of 600 small and medium-sized businesses:

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 Forty percent of these businesses said they currently accept payments using a mobile credit card reader such as Square or PayPal Here.

 Another 16% said that they planned to adopt mobile credit card-processing services within the next year.

Card readers are a big reason why we feel the merchant side will be a driving force in future mobile payments growth.

PayPal Makes A Power Move

In Sept. 2013, PayPal announced an agreement to acquire Braintree, specialized in powering mobile-based commerce transactions, for about $800 million.

In the short term, the deal gives PayPal a pretty significant boost in mobile transaction volume.

 PayPal claims it will handle about $20 billion in mobile transactions in 2013. Braintree will handle around $4 billion.  Adding the two together, that equates to a 170% year-over-year

lift in mobile transaction volume for PayPal.

 With Braintree, we expect PayPal to handle a total of around $193 billion in digital and mobile transactions through

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end, which would be a 33% increase over 2012 (without Braintree, PayPal would only be up 25%).

But the strategy behind this acquisition goes far beyond an instant lift in mobile transaction volume. For PayPal, it's about Braintree's network of clients and its mobile transactions platform.

The Chicago-based company powers transactions for well-regarded e-commerce sites and apps like Airbnb, Uber, Fab, and Rovio. These sites offer in-app purchases and are growing quickly in mobile sales volume and revenue.

Braintree leans heavily on subsidiary Venmo for its Venmo Touch software, which stores users' payment information across a network of Braintree clients and creates a one-touch transaction.

Braintree acquired Venmo last year. Venmo also operates a social payments app with the same name that allows for quick money transfers between friends.

PayPal's deal for Braintree will largely kick off a new wave of consolidation in mobile payments.

The large credit card companies, which handle massive transaction volume each year and have a wealth of cash on hand, will likely lead the next round of acquisitions.

Visa, American Express, and MasterCard have already played in this space, but they may look to bolster their commitments to mobile. The

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quickest way to do so may be to invest in a swift-growing upstart like Square, Stripe, or Dwolla.

Already, Visa's V.me mobile wallet is supported by 253 merchants and 90 banks. Visa has also inked a major deal with Samsung, to get its payments services on popular Galaxy smartphones and other popular Samsung devices.

But Visa's CEO Charles Scharf knows that the future of the payments industry is wide open, and a bit complicated. His approach is to move cautiously, and avoid an all-in bet on a single platform or technology. Any solution, Scharf believes, "has got to be standard- based,

technology-agnostic." In Visa's second quarter earnings call, Scharf went on to say that the key is to build on the existing open nature of the payments industry while also aligning with emerging payment innovation systems mobile and digital wallets."

The State Of NFC: Technology Limbo

In this report, we've mostly touched on mobile wallets and card readers, but we also want to provide an update on near-field communications (NFC) and its role in the fast-moving mobile payments industry. NFC is a technology that allows devices to

communicate with one another at close-range, so it can help payment apps on phones and consoles on in-store registers talk to one another.

We've often discussed the debate between NFC on one side, and apps

and card readers on the other, and we feel card readers will ultimately win out.

However, card readers may be pushing ahead of NFC even faster than we thought.

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It's not that NFC itself, as a technology, is disappearing. NFC chips are still being placed into a huge number of smartphones. According to a report from Strategy Analytics, NFC-equipped smartphone shipments will skyrocket 156% in 2013. That's after growing 200% in 2012, according to Berg Insight.

Yet, Gartner reduced its NFC mobile payments volume forecast by 40% last quarter, citing slow adoption across all markets.

So what's preventing NFC from gaining traction as a perennial payments platform? Here are a few reasons:

 Google Wallet recently dropped the requirement that in order for its wallet app to run, the phone must feature NFC

technology. Google Wallet is now more of a device- and technology-agnostic commerce and payments platform.  Google also created a Wallet app for iOS. Apple has famously

refused to add NFC chips to its iPhones.

 Apple also recently released a new technology for close-range device-to-device communications, known as iBeacons tags. These may turn out to be an NFC killer.

o iBeacons tags have better range than NFC tags. But,

more importantly, iBeacons run on Bluetooth technology, which is available on nearly all smartphones.

Already, iBeacons has also shown its potential beyond mobile payments. Much like the mobile wallet, iBeacons can send users

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various types of content, including location-based services. This technology has already been tested at MLB ballparks.

One company excited about iBeacons is digital agency Roundarch Isobar. Director of Mobile Tim Dunn says he can imagine do-it-yourself retailers like Home Depot that implement iBeacons to make shopping more convenient and seamless.

It's not difficult to imagine how this would work: iBeacons tags are deployed on items around the store, and apps create virtual shopping lists and maps that will direct shoppers around the showroom floor so they can view all the items on their shopping list in-person.

Then, iBeacons might help them finish the transaction at consoles scattered around the store (the payment itself might be powered via the Passbook app, and the user's identity confirmed with the

fingerprint sensor on the iPhone 5S).

The transaction would instantly alert store employees about the order, and they would also use iBeacons to locate the items in their storeroom and prepare the order at the loading docks.

The NFC payments infrastructure is still there — the Berg Insight data reveals that one-third of all smartphones sold in 2012 came equipped with NFC chips. But, retailers and other companies in the market have failed to adopt NFC tags to close the payments loop, putting NFC in a bit of a technology limbo and making it vulnerable to competing solutions like iBeacons.

THE BOTTOM LINE

Mobile transaction volume keeps growing: mobile proximity payments and mobile commerce will account for 2% of all U.S. debit and credit card transaction volume in 2013, and 4% globally.

Globally, mobile payments are considerably larger than mobile commerce, by a factor of three-to-one. In the U.S. mobile payments adoption has been slower, so the two are neck-and-neck.

Consumer uptake has been quick on the mobile commerce side. Mobile wallets are gaining in name recognition, but consumers still seem unsure about whether the products on offer will really make their lives easier.  Smaller merchants are rushing to incorporate cards

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The industry is ripe for consolidation: Look to more deals as legacy credit card and credit card-processing

companies wade further into this space. The PayPal-Braintree deal is a sign of what's to come.

New technologies are emerging, disrupting the chance for a single payments system to take the lead. New solutions like iBeacons are challenging near-field communications, or NFC.

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